Reuters/Moscow

When the head of the Kremlin’s oil major Rosneft, Igor Sechin, went to see Prime Minister Dmitry Medvedev last month to report on his achievements, he proudly boasted about a bullish report from the US investment bank Goldman Sachs.
Goldman’s analysts said they had spotted a buying opportunity in the Russian oil sector.
While energy companies around the world had been hit hard by a global fall in prices, Russia’s oil companies had been spared some of the damage thanks to a collapse in the rouble which lowered their costs.
In fact, Goldman said, Russia’s oil industry, the world’s biggest by volume, was also its most profitable.
A month later, investors don’t yet seem to have heeded Goldman’s advice to buy in. Most are still spooked away from Russia by international financial sanctions imposed by the US and EU over the conflict in Ukraine.
But the taxman has taken notice.
“The Russian firms have generated 600bn roubles ($9bn) in extra revenues from rouble rate changes.
They didn’t earn this money, they are just benefiting from the devaluation. So they need to think how to optimise their spending,” Russian finance minister Anton Siluanov said this week.
Several government sources told Reuters the authorities were planning to seek additional taxes from oil companies next year, citing figures between $3bn and $9bn, to help plug Russia’s widening deficit. An official decision has not yet been taken on the scale and shape of the new taxation.
The sources said recent notes by investment bank analysts about the Russian oil industry - including the one from Goldman that was trumpeted by Sechin – were among the reasons they were now paying closer attention to the oil companies’ bottom lines.
“Oil firms are the main beneficiaries of the devaluation. They have made real money on it. And analysts have all confirmed it,” one senior government source said.
The rouble has fallen in dollar terms about as fast as the price of oil, halving since the middle of last year. As the devaluation gathered pace, it gave a boost to Russian exporters. “We expect the Russian majors to generate the highest free cash-flow yields globally, with Rosneft at the top,” Goldman’s analysts said in their report on August 12.
“We think current valuations offer an attractive entry point,” Goldman said in the 23-page report, which didn’t mention the word “sanctions” once.
Two days later, Sechin crowed to Medvedev that the Goldman report was “a serious signal for the market”.
“They have appreciated our firm’s ability to generate consistently high free cash flows... some $8bn this year. This is the highest result among Russian and international companies,” he said.
Goldman was not the only bank to publish a bullish report.
“Russia is cheap and has a tendency to overshoot. This creates excellent trading opportunities... even at oil prices of around $50 per barrel,” Russia’s biggest bank Sberbank said this month.
Sechin said the good results were partially driven by his cost-cutting drive. But as Siluanov’s comments made clear, the government sees the windfall mainly as an unearned result of currency moves.
Russia’s oil production has grown non-stop for 15 years despite predictions that its mature fields would soon be depleted, and output has continued to increase despite last year’s sanctions.
Still, the sector has serious problems.
The Western sanctions included measures intended to hurt Russia’s future oil production over the long term by limiting its access to technology. High profile exploration and development projects have been scaled back.
Although they pay their workers in roubles, Russian oil companies also have costs in dollars, such as servicing their debt – especially Sechin’s Rosneft, which paid $55bn to buy BP’s Russian oil joint venture before the oil price crash.
So far, bullish analyst reports have not led to a rise in prices for Russian oil company shares, which have remained flat since Goldman blew the bugle to charge.
A Reuters analysis of Russian oil firms’ ownership changes over the past year shows that many major Western funds and asset managers, such as Fidelity, Allianz, Pimco, Credit Suisse, Baring, State Street, UBS – even Goldman Sachs’ own asset managers – have liquidated or drastically cut back their holdings.
Van Eck Associates in the US, a rare investment manager to substantially increase holdings in Russian oil firms, said it had done in line with quarterly rebalancing of funds that track indexes, not out of an active investment decision.
For Russian investment bank Renaissance Capital there has been little surprise that low valuations persist, given Russia’s weakening economy and risks arising from sanctions.
“We see no more value in the sector now than at the end of 2013 – before sanctions and the oil price fall,” it said.